Wall Street Truth or Bunk?

4 Green Stock Picks that Can Bloom in a Perilous Sector

Renewable-energy stocks suffer due to big-picture uncertainties, but prospects are better than they seem.

By Bob Frick, September 3, 2010

When you invest in a renewable-energy stock nowadays, the company’s prospects are almost a secondary concern. More so than for any other sector, you have to think primarily about the big picture: What’s the direction of energy prices? (Rising prices good; falling prices bad.) What’s in store for U.S. energy policy? (See U.S. Energy Policy: Is Uncle Sam Green Enough? for more about that.) Will states ramp up requirements for renewable energy? Will China continue to spend on green projects like a drunken sailor on shore leave?

Uncertainty surrounding all of those questions explains why the alternative-energy sector has performed so poorly this year. Year-to-date through September 2, the WilderHill Clean Energy index, which tracks 54 companies around the world, dropped 18%. By contrast, Standard & Poor’s 500-stock index lost 2%.

The dismal performance of renewable-energy stocks disguises some good news in the sector. Many green companies continue to book higher sales and profits, and their stocks will likely blossom once the financial and regulatory pictures become clearer. (The venture-capital community is still high on green stocks. See Venture Capitalists Go for Green for more about that.) Below, we describe our four favorites.

Regardless of fuel prices and government policy, many green-energy companies are thriving, says Jack Robinson, manager of Winslow Green Growth Fund (symbol WGGFX). Except for water utilities, all of the categories in renewable energy are growing by double-digit percentages annually, Robinson says, and “money ultimately follows growth.”

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One of Robinson’s favorites is WaterFurnace Renewable Energy, a small company that is based in Fort Wayne, Ind., but trades on the Toronto Stock Exchange under the symbol WFI.TO. When we caught up with Robinson recently, he was having a WaterFurnace geothermal system installed at his Rhode Island vacation home. The company’s systems take advantage of steady temperatures below ground to provide heating and cooling for residences and businesses. These geothermal systems, Robinson says, are reliable and pay for themselves in a reasonable amount of time, even without the federal government chipping in for 30% of their costs -- a benefit available for most renewable-energy systems. He figures that the money the system saves will offset the cost in four and a half years with the subsidy and seven without.

WaterFurnace generates annual sales of only $129 million, but the company is highly profitable (all numbers relating to WaterFurnace are in U.S. dollars; share prices and related figures for all companies mentioned in this story are through the close on September 2). It has averaged a 40% return on equity over the past 16 quarters, Robinson says. In its second quarter, the company’s sales rose 15.5% from the same period a year earlier, although profits fell from 30 cents per share to 27 cents. WaterFurnace pays a quarterly dividend of 22 cents a share. At $24.21, the stock yields 3.6 %.

The classic case of a green-energy company that’s dominant in its field but whose stock hasn’t been getting much respect is First Solar (FSLR). At $134.89, the stock is basically where it was a year ago, although the price has bounced around plenty in the interim.

Analysts had predicted earnings of $1.60 per share and revenue of about $543 million for the second quarter -- estimates that First Solar trounced, with earnings of $1.84 per share and revenue of $588 million. Analysts expect annual revenue of $2.6 billion in 2010, jumping to $3.6 billion in 2011, and they expect earnings to rise from $7.37 per share in 2010 to $8.14 in 2011.

Currently, though, the company is feeling the effects of tightening profit margins and the costs it incurred to settle problems with apparently faulty solar modules it made more than a year ago. The predicted earnings for 2010 are actually down from the $7.53 per share First Solar earned last year.

But demand for photovoltaic cells is booming, so this year’s setback in profits is temporary. First Solar is expanding its business in Europe, driving down the price of the super-efficient type of solar cells it makes and even opening a plant in China. If you look at the big picture, the company has clear skies ahead and will continue to be the leader in solar energy in the U.S.

Full disclosure: I recommended First Solar in the June 2009 issue of Kiplinger’s Personal Finance magazine (Green Energy Rising), with the stock at about $142. I still like it, obviously.

In that issue I also endorsed Cree (CREE), another company that I am re-recommending. That stock has fared much better, climbing from $27 to as high as $83 in April. It closed September 2 at $55.62.

In that story I mentioned that the light-emitting diodes Cree made could be found in $20 flashlights sold in hardware stores. The price of those flashlights has dropped to $5, and chains such as Home Depot are beginning to stock LED light bulbs, including some that use Cree components. LED bulbs will shine continuously for six years before burning out, and they use 85% less power than an incandescent bulb and half as much as a fluorescent bulb. A 40-watt-equivalent LED bulb costs $20, but with normal use it’ll last 46 years.

The boom in LEDs is lighting up Cree’s results. In Cree’s fourth fiscal quarter, which ended June 27, sales rose 79%, to $264.6 million, from the same quarter a year earlier, and profits zoomed 445%, to $52.8 million. Analysts estimate that Cree will earn $2.41 a share in the fiscal year that ends June 2011, up 41% from the just-concluded year. The stock trades at 23 times that estimate, a reasonable price for a company that is expected to generate earnings growth of 22% annually over the next three to five years.

My final pick may require even more patience than the other stocks do. American Superconductor (AMSC) makes electrical systems for wind farms and turbines, and the U.S. wind-turbine business is now in one of its periodic slumps. The American Wind Energy Association reports that U.S. wind-power installations fell 71% in the second quarter compared with the same period in 2009.

But by fretting too much about business in the U.S., investors are underestimating American Superconductor’s global reach. Its biggest customer is Sinovel Wind Group, of China, where green energy is booming as a result of government fiat.

But selling systems to wind farms isn’t what’s exciting about American Superconductor. The big potential lies in the superconductor part of the business. Building massive wind farms in the Midwest, where the wind blows steadily, comes with a big problem: You lose a lot of electricity transporting that power to population centers on the coasts. American Superconductor’s superconducting wire helps reduce the amount lost. The company could reap enormous revenues by supplying Chinese and South Korean grid projects, as well as the Tres Amigas Superstation, in Santa Fe, N.M., which will tie the U.S.’s three major power grids together.

Even without these deals, American Superconductor is already growing rapidly. Analysts are looking for revenues to rise 36%, to $431 million, for the fiscal year that ends next March. They expect earnings to climb 77%, to $1.24 per share, in the current fiscal year and to $1.64 per share in the March 2012 year. At $28.41, the stock trades at 23 times estimated fiscal 2011 earnings. That’s a fair price for a company that is already growing rapidly, even before accounting for the superconducting kicker that could supercharge its numbers starting next year.

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